Thursday, August 31, 2017

The court affirmed the trial court’s dismissal of a claim
against the Gap for selling lesser-quality products at its Gap and Banana
Republic factory/outlet stores that were never sold at its ordinary stores. Rubenstein didn’t sufficiently allege a
misrepresentation or actionable omission. Rubenstein didn’t identify any advertising
or promotional materials or any Gap other statements that its factory store
clothing items “were previously for sale in traditional Gap stores or were of a
certain quality.” The mere use of its own brand names wasn’t deceptive just
because the apparel wasn’t of the quality that Rubenstein had come to expect. “As
a matter of law, Gap’s use of its own brand name labels on clothing that it
manufactures and sells at Gap-owned stores is not deceptive, regardless of the quality
of the merchandise or whether it was ever for sale at other Gap-owned stores.
Retailers may harm the value of their brands by selling inferior merchandise at
factory stores, but doing so does not constitute false advertising.” [This line of cases directly addresses,
perhaps for the first time in litigation, the occasional debate in the
literature about whether trademark owners should be responsible to consumers
when they break their own promises about consistent quality that are
communicated by a trademark with secondary meaning.]

Plaintiff alleged that “[r]easonable consumers believe
outlet stores sell products that were previously available for purchase at
retail stores,” but didn’t allege specific facts showing this to be true.

Moreover, a consumer for whom the
retail history of factory store items is material can ask Gap employees about
this. A reasonable consumer would also inspect the quality of factory store
clothing items before buying them and could return items after purchase if they
turn out to be unsatisfactory. In the end, the allegation that Gap is not
living up to the quality standards it has set for Gap and Banana Republic
brands fails to state a cause of action for a fraudulent business practice
under the UCL.

There was also no duty to disclose; the use of the brand
name didn’t constitute a partial representation “even if the products are
alleged to be inferior to other brand name products.”

Nor was selling nonidentical brand-name clothing in a
factory store “unfair.” In particular, “[t]he
injury alleged is not substantial because consumers are getting Gap and Banana
Republic brand name items for low prices.”
This interestingly suggests that there’s no quality differential to the
extent that consumers are just buying the brand name, not the clothes. Plus, consumers could have asked sales
associates about the items’ history and examined their quality before purchase.

Defendants sell online reports on people using information
compiled from public records and other sources.
When a consumer uses a search engine to search a person’s first and last
names, dynamic keyword ads appear, with the first and last name automatically
plugged into an otherwise generic ad. The
ads “give the appearance that the reports contain valuable information about
the searched-for person, such as arrest records, background check, phone
number, and address.” Plaintiffs sued Intelius and other entities under the
Illinois Right of Publicity Act for this advertising; Intelius got out for lack
of personal jurisdiction but the others got out on a motion to dismiss on the
merits.

The Illinois Right of Publicity Act prohibits the use of “an
individual’s identity for commercial purposes during the individual’s lifetime
without having obtained previous written consent from the appropriate person.” IRPA
defines “identity” as “any attribute of an individual that serves to identify
that individual to an ordinary, reasonable viewer or listener, including but
not limited to (i) name, (ii) signature, (iii) photograph, (iv) image, (v)
likeness, or (vi) voice.” Defendants
argued that they didn’t use plaintiffs’ “identities” because the ads only
reflect the coincidental result of a third-party’s internet search for their
names, without any additional information to identify one “Anna Dobrowolski” or
“Nicole Vinci” over another. Even though IRPA specifically uses “name,” that’s
in the context of identifying a particular individual; a name alone isn’t
necessarily sufficient to identify an individual, since many people have the
same name. The use at issue must serve “to identify that individual to a
reasonable audience.”

Plaintiffs argued that defendants designed their ads to make
a person searching the internet for “Nicole Vinci” or “Anna Dobrowolski”
believe that the defendants had located the plaintiffs and had information on
them. But that wasn’t enough. Though a
plaintiff need not allege facts sufficient to show that she was identified to
the exclusion of all other persons bearing their name or likeness, she must
still allege facts to plausibly infer that she was identified to a reasonable
audience by the defendant’s use. Without any additional context, “Anna
Dobrowolski” or “Nicole Vinci” didn’t identify the plaintiffs. The complaints
do not suggest that the ads identify the plaintiffs in any manner except for
name. The fact that the defendants benefited from designing their ads in the
way they did still didn’t mean they identified the plaintiffs in particular.

To deal with a possible amended complaint, the court also
addressed defendants’ arguments that because the names “Anna Dobrowolski” and
“Nicole Vinci” were automatically populated into defendants’ generic ads as the
result of a third-party’s search, the plaintiffs could not show that the
defendants intended to appropriate
the names “Anna Dobrowolski” and “Nicole Vinci.” But the requisite intent is
simply “to use the material about the plaintiff for trade purposes”; the
defendants’ intent to use full names in their otherwise generic ads was enough.

Defendants also argued that a ROP claim required the
plaintiff’s identity to have intrinsic or commercial value before the
defendant’s use. Though some pre-IRPA case law required this, IRPA did not—it’s
about each individual’s “right to control and to choose whether and how to use
[their] identity for commercial purposes” and isn’t limited to protecting
celebrities or public figures. [Query,
as usual, how this is at all compatible with the First Amendment in the absence
of falsity/misleadingness.]

Nor did an IRPA claim require an apparent endorsement. Even
if ads stating “Anna Dobrowolski Located” or “We Found Nicole Vinci” don’t
suggest to a reasonable viewer that Anna Dobrowolski or Nicole Vinci endorse
defendants’ products, IRPA doesn’t require that the defendant’s commercial
purpose be an apparent endorsement. “IRPA’s definition of ‘commercial purpose’
is broad, and the act contains no endorsement requirement. Neither does IRPA
have a falsity requirement.” Which is
why it’s unconstitutional, especially as applied to services like this one.

Wednesday, August 30, 2017

APT sued VWR, a competitor in the market for nonwoven,
disposable laboratory apparel for use in clean rooms and similar environments. VWR
formerly carried APT’s Critical Cover line of laboratory apparel products, but
transitioned to its own private line of products, prompting this lawsuit, which
survived a motion to dismiss but not summary judgment.

APT used a proprietary fabric coating method to produce its products. For a time, the parties agreed
that VWR would be APT’s exclusive distributor of Critical Cover, and that VWR
had the exclusive license to use the Critical Cover trademark and promotional
literature. APT began outsourcing components of Critical Cover products
in the early 2000s, using XXPC, a company that made lab apparel for other
competitors. APT disclosed its resins
and recipe for the extrusion coating with XXPC, under an oral confidentiality
agreement.

VWR sought bids from suppliers in China to use as
comparators with the APT garments, and XXPC submitted a successful bid. APT ran tests and monitored the resins it sent to XXPC and concluded
that XXPC didn’t use APT’s materials to produce VWR’s products.

In 2010, VWR launched its private label line, branded Basic,
Advanced, and Maximum Protection. The marketing materials explained that it was
transitioning from the Critical Cover line to its new line and explained that
VWR “ha[d] not changed the manufacturer, manufacturing location, or the
manufacturing process for 95% of the products in [the] new line. For the
majority of the portfolio, only the brand name and part numbers w[ould] change.”
It also certified that some of the new private label products did not
experience a change in raw materials from the Critical Cover line. VWR referred
to a number of APT marks as points of comparison for VWR’s new Basic, Advanced,
and Maximum protection lines, including a comparison chart with specs and
drawings.

There were initial concerns about VWR’s shoe covers flaking
more than Critical Cover shoe covers, and XXPC produced a second generation of
shoe covers that addressed those issues. Independent testing established that
the performance specifications of VWR’s new line were superior to APT’s in some
respects and used a different combination of resins. VWR issued a correction
letter advising end users to conduct their own testing, as it could no longer
verify that the raw materials it used were exact.

The court found that APT couldn’t show misappropriation of
trade secrets, because its resin recipe could be reverse engineered, which
precludes trade secret protection in Pennsylvania.

Trademark infringement/false designation of origin: APT
argued that VWR’s representations caused customers to believe that VWR’s new
product line was comprised of Critical Cover products under a different brand
name, thereby falsely representing its origin/causing initial interest
confusion. The court accepted the basic
theory to avoid a situation in which “a defendant could escape liability for
passing off simply by using another’s mark—a false designation of origin—to
establish the equivalency of the other’s mark and the defendant’s new mark, and
then shift to using only its new mark.”
[Of course, that description is an overgeneralization: if the products
are equivalent, then an equivalence claim is not false; it’s just comparative
advertising.]

VWR argued that Dastar
barred this claim, but the court disagreed; the case could be analyzed as a
regular passing off case. Still, on
summary judgment, APT didn’t raise a triable issue on likely confusion. Customer care and attention “casts great
doubt on any likelihood of confusion,” given that the relevant purchasers were
experienced professionals buying apparel for use in clean room/controlled
environments, “where customers’ validating procedures tend to be thorough.”

Likewise, the evidence of actual confusion and the length of
time the mark was used without actual confusion weighed against a likelihood of
confusion. Three customers “engaged in conversation with APT about the
transition, asking APT for further explanation of the differences between VWR’s
new product line and the Critical Cover products.” This wasn’t trademark
confusion, but rather confusion about “whether a VWR-produced product they
purchased was equivalent to APT’s Critical Cover products.” Other communications identified by APT didn’t
indicate any confusion. For example, communications
noting problems with VWR’s first generation of shoe covers “might support that
the customers believed they were receiving an equivalent product that would
perform in the same manner as APT’s products,” that again wasn’t trademark
confusion.

VWR’s intent also weighed against finding likely
confusion. VWR knew that it could be
easier to proceed through certification and testing procedures if it
represented that was the same product that APT produced, but that’s different
from adopting a similar mark. It didn’t “adopt”
a similar mark at all; it compared its products to those of APT. (Again, “use as a mark” is a shortcut/an
explanation for why there’s no confusion.)

False advertising: This is a better theory, but it fares no
better in the end. APT argued that VWR
falsely equated the parties’ products, causing customers to believe that VWR’s
products were Critical Cover products under a different brand name (because
they had the same components and processes).
APT tried to rely on a presumption of causation and materiality based on
literal falsity, but those presumptions don’t apply when a plaintiff seeks only
monetary damages, not an injunction. (I’d
think the customer complaints about the first generation might tend to show
materiality, even without a presumption.
Separately, I haven’t seen this distinction articulated for actual
deception before—it seems to get rid of the literal falsity/misleadingness
distinction for money damages cases, requiring evidence of deception, probably
a consumer survey, no matter what the theory is—which doesn’t make a lot of
sense for a straight-up literal falsity case.)
Even if some of VWR’s statements were literally false, APT failed to
show (1) actual deception or a tendency to deceive and (2) materiality. “These
requirements are not easily satisfied.” There was no non-hearsay customer
testimony that the statements misled customers or influenced their purchasing
decisions.

Ah, implicature, how I wish judges understood you. A product labeled “100% Grated Parmesan
Cheese” is, apparently, ambiguous—it could mean the product has a bunch of
different ingredients, but the parmesan component is 100% grated, rather than
only partially grated. This is nonsense
for a product that purports to be cheese, though it would make sense for a non-cheese-only product with a “made with 100% grated parmesan cheese” label. In fact, the common-sense comparison is the
challenged phrase with or without “made with”—on its own, the “100%” naturally
applies to all the words following it.

Anyway, plaintiffs alleged that they were misled by the labels
because the products contained a nontrivial amount of cellulose. Each product’s ingredient list disclosed the
non-cheese ingredients, in smaller, less conspicuous print. Each ingredient
list states that the cellulose is added “to prevent caking.”

The court agreed that plaintiffs had Article III standing,
having purchased a product allegedly worth less than what they paid and what
they were promised.

Synthesizing consumer protection precedents from multiple
jurisdictions, the court concluded that “[w]here a plaintiff contends that
certain aspects of a product’s packaging are misleading in isolation, but an
ingredient label or other disclaimer would dispel any confusion, the crucial
issue is whether the misleading content is ambiguous; if so, context can cure
the ambiguity and defeat the claim, but if not, then context will not cure the
deception and the claim may proceed.” This
isn’t entirely consistent with the cases the court quotes, such as the 9th
Circuit’s Williams—here’s the quote
the court pulls from Williams: deceptive
marketing claims survived a motion to dismiss where there were “a number of
features of the [front of the packaging] … which could likely deceive a
reasonable consumer,” and a consumer thus “should [not] be expected to look
beyond misleading representations on
the front of the box to discover the truth from the ingredient list” (emphasis
added). The question is whether a
consumer might rely on the product name without checking the ingredient list,
and ambiguity can certainly play a role there, but a consumer might make
inferences even from a theoretically “ambiguous” claim and not check the
label. Of course, the larger problem
here is that there’s nothing ambiguous about “100% Grated Parmesan Cheese” in
context.

The court continued: “consumers who interpret ambiguous
statements in an unnatural or debatable manner do so unreasonably if an
ingredient label would set them straight.”
The court conflates “unnatural” with “debatable” here, I think—if a
substantial portion of consumers are confused by a claim, the fact that others
aren’t, and that the question in general is “debatable,” shouldn’t matter
(absent some cost-benefit analysis, at least—so if there’s a good way of
communicating the truth to avoid deceiving the relevant subset of consumers,
that should be used).

The court analogized people who thought that “100% Grated
Parmesan Cheese” meant that the product was 100% parmesan cheese to people who
thought that Froot Loops were made with fruit.
The phrase was ambiguous because “it also might be an assertion that
100% of the cheese is parmesan cheese, or that the parmesan cheese is 100%
grated. Reasonable consumers would thus need more information before concluding
that the labels promised only cheese and nothing more, and they would know
exactly where to look to investigate—the ingredient list.” Thus, the labels
weren’t deceptive.

Comment: that statement might avoid perjury because of this
equivocation, but that’s not the standard for consumer protection cases. A reasonable consumer shouldn’t have to ask
follow-up questions when the product says on the front that it’s 100% one
thing.

The court thought that the nothing-but-cheese reading was
the least plausible of its three
possible interpretations, because it thought that consumers should know that a
product that was packaged and shelf-stable at room temperature could not be
pure cheese. Really? Because I buy
parmesan in unrefrigerated-but-sealed chunks, and I’ve also been known to buy
Parmalat, a shelf-stable unrefrigerated milk.
We live in an age of miracles and wonders; I’m not saying I’d expect
cheese to last centuries, but leaving a dry cheese like parmesan sealed but
unrefrigerated seems plausible to me. Still, I’m apparently unreasonable,
because reasonable consumers “would still suspect that something other than
cheese might be in the container [of unrefrigerated, shelf-stable cheese], and
so would turn it around, enabling them to learn the truth from a quick skim of
the ingredient label.”

Anyway, warranty and unjust enrichment claims failed for the
same reason.

Assuming this alcoholic beverage is not made from honeycrisp apples--but that it does contain honey--would the product name be false or misleading? H/T Adam Levitin. Note that the manufacturer doesn't disclose the apple variety one way or another, as far as I can tell.

The Universal Church, Inc., is a Pentecostal/Charismatic
church with “around 30,000 members,” while its Brazilian affiliate has millions
of members. Defendant ULC is a nonprofit that offers free ordinations to its
members; it’s an offshoot of a church founded in California in the 1950s that
was initially called the “Universal Church.” The plaintiff registered “Universal Church,”
“The Universal Church,” and “Universal Church of the Kingdom of God.” The first
and third were registered for use in “evangelistic and ministerial services,
namely, conducting religious worship services” and became incontestable in
2012. “The Universal Church” was registered in 2012 for use in “religious
counseling and ministerial services,” “newsletters and informational brochures
all about religious beliefs and practices,” and “t-shirts distributed in
connection with religious groups.”

In 2009, defendants attempted to register “Universal Life
Church” and several similar marks; they were rejected on 2(d) grounds and the cited
marks included “Universal Church” and “Life Church.” They abandoned the
applications.

Plaintiff challenged five types of uses: (1) 17 domain
names, including universalchurch.org (registered in 2010), containing the
phrase “universal church”; (2) use of “Universal Church” on the
universalchurch.org website;

(3) use of “Universal Church” in the website’s metadata so
that the website’s name shows up as “The Universal Church” in search results;

(4) bidding on
advertising keywords, including “the universal church,” so that defendants’
websites appear in Internet search engine ads; and (5) “hijacking” map-based
searches so that defendants’ website is associated with the location of
plaintiff’s churches. For example, the Google Maps search result for plaintiff’s
church at 1077 Southern Boulevard in the Bronx was linked to defendants’
website, themonastery.org, as shown below:

The court found that “Universal Church” was generic for the
services at issue—in a useful point that reminds me of the Seventh Circuit’s Car Freshner case on descriptive fair
use, the court noted that the question of who bears the burden of proof on
protectability “turns on whether plaintiff is attempting to enforce its
trademark within the class of services for which it was registered.” The court interpreted “evangelistic and
ministerial services, namely conducting religious worship services,” broadly,
since ordaining ministers as defendants do is a “ministerial service.” Also, plaintiff had apparently objected to
many other uses by other religious and even non-religious organizations,
indicating the breadth of its interpretation of the class. Thus, plaintiff was entitled to a presumption
of validity.

Still, “universal” was generic for churches. There was lots of evidence, dictionary and
historical, that “universal” is understood as referring to the entire Christian
Church or all Christians collectively. “Universal” for churches has a similar
meaning to “catholic,” which is simply the transliteration of the Greek word
for “universal,” “καθολικóς” or “katholikos.” (The court later says it isn’t
opining on whether Catholic is itself generic.)
The parties agreed that this meaning was “well-established within the
Roman Catholic Church and that at least some non-Catholics understand and use
the term in this sense.” The use had
existed for hundreds of years, or thousands if you add in the original Latin
and Greek versions. Defendants also presented
evidence that numerous churches use “universal” and “universal church” in their
name. It’s even part of the name of a
denomination, Unitarian Universalism.

Plaintiff’s evidence of trademark meaning was minimal. It claimed that it used the mark in
connection with its 230 physical locations and weekly broadcasts that reach
800,000 people. But this was based on testimony from its own employees, which
had little probative value; it couldn’t substantiate the viewership claims with
documentary evidence. Even if the court
accepted the plaintiff’s claim to use the “Universal Church” mark in connection
with its physical churches and broadcasts, that didn’t show how the mark is
understood by the vast majority of the “relevant public” who don’t belong to the
church. The only evidence about that public was two articles referring to
plaintiff as the “Universal Church.”

Based on this record, “the primary significance of ‘universal
church’ to the relevant public is a type of church rather than plaintiff,
namely one that considers itself to be universal in the sense of representing
the entire Christian church.” The court
declined to grant the plaintiff a monopoly over “universal” in church names, “a
monopoly which plaintiff has already indicated that it would enforce
aggressively. We are persuaded that the trademark law is simply not intended to
allow the mark to be weaponized by plaintiff in this way.”

Even if the court found that “Universal Church” was
descriptive, it would still reject the plaintiff’s claim, due to the weakness
of the mark and other factors. As to
actual confusion, “plaintiff’s evidence suggests that someone searching the
Internet for ‘universal church’ will sometimes land on defendants’ website.” But the evidence didn’t show that this was
because of defendants’ use of the mark, or that people conducting such a search
were actually looking for the plaintiff.
And there was no evidence that anyone purchasing ordination services was
confused by defendants’ use of “Universal Church.” Plaintiff’s survey allegedly showing likely
confusion “attempts to measure the extent to which someone googling ‘the
universal church’ would believe that he had landed on a website for an entity
called “The Universal Church.”
(Googling!) But that was of
limited value because the survey takers were just told they were searching “for
a generic entity named ‘The Universal Church,’ without any attempt to measure
whether the survey takers associated such an entity with plaintiff.”

Plaintiff’s VP testified that “many” of its pastors and
members “had a hard time trying to reach our correct Web site while they were
searching for our domain.” This was too vague to show actual confusion, or that
such confusion “resulted from defendants’ use of plaintiff’s trademarks, as
opposed to, for example, defendants’ non-infringing search optimization
strategies.” Neither party discussed IIC
separately, but the court doubted whether initial interest confusion is even
relevant here, because IIC requires confusion, not mere diversion. Similarly, instances where individuals
“refer[red] to the defendants by the misnomer Universal Church” weren’t
relevant to confusion claim because “universal church” wasn’t being used to
refer to the plaintiff.

The court did note that a reasonable juror could come out
either way on defendants’ intent; it just didn’t matter, even if intent favored
the plaintiff.

The quality of defendants’ services, which the Second
Circuit hasn’t gotten around to eliminating, was interesting if only because
the court was called on to judge the quality of religious services. “Plaintiff
argues that defendants’ ordination services are inferior because they allow
anyone to become ordained online without committing to a particular teaching or
faith, without formal education, without training, and without committing to
attend to the spiritual needs of others. On the other hand, the features that
plaintiff views disparagingly are likely the very features that defendants’
customers value. Thus, we find that defendants’ services are not inherently
inferior.”

Cybersquatting claims failed too, of course; even if the
mark weren’t generic, the primary cybersquatting claim would still have failed because the mark was not
distinctive at the time universalchurch.org was registered, in 2010, before the
“Universal Church” registration became inconstestable and before it acquired
any secondary meaning.

The court granted summary judgment sua sponte on the NYGBL
claims because they couldn’t succeed; ordinary trademark or trade dress infringement
claims are not cognizable under §§ 349 and 350 unless there is a “specific and
substantial injury to the public interest over and above ordinary trademark
infringement or dilution.” The plaintiff
argued that there would be harm from getting the wrong religious services, but “the
injury is precisely the type of injury that results from ordinary trademark
confusion and does not constitute a separate public injury.”

Monday, August 28, 2017

Another illustration of the principle that courts don’t like
to do two dilution analyses—this state court only talks about federal dilution,
assuming that the analysis is the same for both. Open Text owns RightFax, software that allows
users to fax documents via computer, without a fax machine. Instant and Open Text had a contractual
relationship; after that ended, Open Text allegedly told customers that Instant
wasn’t permitted to service RightFax. Instant disagreed and sued for tortious
interference and violation of the UCL.
Open Text counterclaimed for trademark infringement, dilution, and false
advertising under state and federal law, as well as breach of contract, and
sought a preliminary injunction, which the trial court denied. The false
advertising claim was based on emails from Instant stating that certain
RightFax products would be reaching its “support end of life” or “end of life.”
The court of appeals affirmed the denial of the preliminary injunction.

The court reviewed the denial of the preliminary injunction
for abuse of discretion; the factors are (1) likelihood of success on the
merits and (2) interim harm to the plaintiff absent an injunction compared to
harm to the defendant with an injunction.

The court of appeals used the Ninth Circuit nominative fair
use “defense,” holding that all three prongs are factual questions. Though the trial court issued only a one-line
order, California courts of appeal presume the trial court made all findings
necessary to support the order, and thus affirm if substantial evidence exists
to support such findings. Factor one:
there was evidence that the service Instant provides for support of RightFax is
not readily identifiable without specifically naming RightFax. Factor two: Instant submitted evidence that
it used only so much of the mark as was reasonably necessary to identify its
own service. On Instant’s RightFax webpage, Instant states: “Instant
InfoSystems has been providing world-class technical support for RightFax for
nearly 20 years. Our vast experience and depth of technical expertise with
RightFax has helped large and small companies implement reliable, secure, and
cost-effective solutions for sending and receiving documents ....” Factor three: There was evidence that Instant’s
homepage, which displays a list of Instant InfoSystems’s partners, doesn’t list
Open Text as a partner. It also had a Web page dedicated to explaining the
company’s history, the previous partnership with Open Text, and that the
partnership had come to an end. Though Instant at one point referred to itself
as “the Right Fax Experts,” this was replaced with “the Fax Experts,” and
Instant removed all references to partnership awards from Open Text from its
website. (Query whether these last steps
were necessary; certainly it would seem fair and truthful to put the awards on
the history page.) Based on all this,
substantial evidence supported the trial court’s implied finding of nominative
fair use.

Nominative fair use also precludes a finding of trademark
dilution because, by definition, it doesn’t “create an improper association in
consumers’ minds between a new product and the trademark holder’s mark.”

False advertising: the parties submitted conflicting
evidence pertaining to whether a consumer would be deceived regarding the term
“end of life.” Open Text’s declaration from its RightFax product manager stated
that he had to make on-site visits to customers to convince them RightFax would
continue to be supported after the emails, and that Instant had informed
several customers RightFax was dead, which required him to respond. But
Instant’s declaration from a former employee at RightFax’s previous owner stated
that “end of life” was used properly by Instant as it was understood in the
industry, and was even used in such a way by Open Text’s current partners when
referring to RightFax. Presuming that
the trial court resolved the conflicting evidence in favor of Instant, the
court of appeals affirmed the finding of no likely success on the merits.

Finally, substantial evidence supported the implied finding
that the balance of harms didn’t tip in favor of Open Text. Instant’s harm if
the preliminary injunction was granted was the loss of business involving
RightFax services, which it had been performing for 15 years. The status quo was seven months of Instant using
the RightFax trademark on its Web site and in other communications, which an
injunction would immediately change. Further, Open Text waited more than seven
months after terminating the parties’ agreement to object to the continued use
of the RightFax mark, supporting the trial court’s finding on the balance of
harms.

Ugh. Costco’s TruNature Gingko labels represent that the
product “supports alertness & memory,” that “Gingko biloba can help with
mental clarity and memory,” and that “[i]t also helps maintain healthy blood
flow to the brain to assist mental clarity and memory, especially occasional
mild memory problems associated with aging.” Plaintiff alleged that these were
false or misleading under the UCL and CLRA.
Relying on In re GNC Corp., 789 F.3d 505 (4th Cir. 2015), the court here
found that this was an impermissible lack-of-substantiation claim, and that
therefore a private plaintiff can never prove falsity “when a defendant offers
scientific evidence and admissible expert testimony supporting an advertising
claim about the efficacy of the product in question.” To prove falsity, all reasonable experts in
the field must agree that the representations are false. The court found that California would follow GNC, because no state court cases have
rejected it, but I doubt that given the state’s tradition of consumer
protection and its occasional rejection of the Lanham Act analogy ostensibly
underneath GNC (occasional because
there’s so much California consumer protection law that the analogy is only
rarely made).

Mullins v. Premier Nutrition Corp., 178 F.Supp. 3d 867 (N.D.
Cal. 2016), held that a plaintiff could prove claims “literally false if a
reasonable jury concludes that all reasonable scientists agree,” or that the
claims are “misleading by showing that the vast weight of the competent
evidence establishes that those health claims are false.” This is an attempt to
draw off some of GNC’s poison, but as
we will see it doesn’t work well. The
main reasons that this formulation isn’t a good one are that (1) the Lanham
Act’s false/misleading distinction, from which GNC’s consumer protection law reasoning is supposedly drawn,
doesn’t have anything to do with “all reasonable scientists” v. “vast weight of
the competent evidence,” but rather with issues of consumer perception, and (2)
the way scientific evidence works doesn’t generally allow for such a
distinction; the most you can say about any given study is that, at various
levels of quality, it provides support for an affirmative claim or it doesn’t
provide support for that claim. Mullins said that, for misleadingness, a
plaintiff “can concede the existence of scientific studies substantiating a
representation, but argue that those studies are poorly designed, incredible,
or represent the view of a minority of scientists.” But now we are firmly
detached from the idea of consumer perception, and the existence of poorly
designed or “incredible” studies shouldn’t be allowed to avoid a finding
literal falsity anyway!

It is one thing to say that “[i]nconclusive findings and
unsettled science are insufficient to meet Plaintiffs’ burden of raising a
question of fact on the issue of falsity,” and quite another to say, as if it
were a mere restatement, that “mixed evidence demonstrates at most that the
science on [the product’s] effectiveness is inconclusive.” This is the fallacy of the excluded middle:
in the former situation, even crediting all the evidence, the plaintiff
couldn’t meet its burden of proof at trial on the merits; in the latter, it
might be the case that, depending on which evidence you credited, the plaintiff
could meet its burden. This distinction
may seem fine, but it makes a big difference because it is about whether courts
will throw up their hands when truth is in question—the very essence of the
factfinding project. And that’s not hyperbole on my part, that’s from the
courts following GNC: “where there
are studies demonstrating both the effectiveness and ineffectiveness of the
Products, a reasonable jury could not find that the advertising claims are
false.”

So, the court here reasoned, “when a defendant presents
scientific studies supporting its advertising claim, a plaintiff must do more
than present its own studies that do not support the advertising claim, thereby
demonstrating that evidence is equivocal.” Mullins, with which the court here
disagreed, held that the plaintiff could offer “principled, supported
critiques” of the defendant’s studies, allowing the jury to disregard them or
to find the plaintiff’s studies more persuasive and thus find the advertising claims
misleading.

The court here also found that the plaintiff was only
alleging falsity, not misleadingness, because it thought misleadingness had
nothing to do with consumer perception.
Though she used the words “false and misleading,” she was really arguing
that the claims were misleading because they were false. Again, the court didn’t seem to understand
misleadingness as something that happened on the consumer end. In fact, consumers might—and, we know from
other studies, in fact do—think that a claim on the label of a supplement has
substantial scientific weight behind it, including FDA approval; they are thus
misled, quite possibly materially, about the quality of the claim.

“Whether the Label Claims are true or false is a binary
choice—they are true, or they are false. When the scientific evidence is
equivocal, it is impossible to prove that an advertised claim is either
literally true or literally false.”
Comment: This is (ironically?) at best misleading. Not all cases in which there are factual
disputes—even cases where there is enough on both sides to get past summary
judgment—are “equivocal.” Many of them
are merely contested, something that courts see easily enough in the ordinary
partisan context. That doesn’t deprive
the factfinder of the ability to determine which is the truth, and if it can’t
do so, then the burden of proof does the necessary work. GNC,
as I feared, has led to a series of false equivalences, with slippages in
meaning each time—from judge-made Lanham Act doctrine to consumer protection
law, from false to misleading, from “equivocal” to “equipoise.”

“Essentially, Plaintiff is arguing that the Label Claims
could be misleading because a jury could find that Defendants have not proven
them to be literally true, which is little more than a ‘lack of substantiation’
claim.” Comment: No, the jury could find that the statement “this product aids
memory” is false, because the plaintiffs’ evidence about the studies makes its
falsity more likely than not. If a good
study would likely have shown an effect, and a good study exists that didn’t
show this effect, that tends to make it more likely that there is no
effect—indeed, that’s why you try to disprove a hypothesis. “Literally false” and “lie” are not the same
thing (even if “literally false” was a part of consumer protection law).

“In sum, when a plaintiff presents admissible expert
testimony that scientific studies do not support an advertised claim, and a
defendant presents admissible expert testimony that scientific studies support
the advertised claim, the evidence is equivocal and all reasonable scientists
do not agree. No jury conclusion would change either of these facts.” Comment:
Note how misleadingness, in the ordinary sense of causing consumers to have
false beliefs regardless of literal truth, has become conceptually impossible
as well. Under the court’s reasoning,
attempting to prove misleadingness would also cause the impermissible
“substantiation” problem—because the fact that a statement deceived consumers
about the level of proof would also not change the fact that there was
scientific evidence on both sides.

Missing from the court’s reasoning about substantiation is
the role of the burden of proof. A
substantiation requirement means that the defendant has the burden of showing
that its claim is true. A falsity or
misleadingness requirement means that the plaintiff has the opposite burden;
scientific studies showing no effect are one way of meeting that burden. In fact, they are the best way to do so,
though whether they are sufficient in any given case may well be a matter for
the jury.

I think the courts who follow GNC have been confused about the concept of “scientific study” and
its intersection with a very different mode of factfinding, the judicial trial.
Consider the following claim: X sold the most houses in the county last
year. This might or might not be true; we
have various means of getting at the truth; we might even have conflicting
evidence (records, after all, may be imperfect; sometimes the best evidence
comes from fallible human memory, or human testimony that might require a
factfinder’s credibility evaluation).
Could anyone seriously maintain that “X sold the most houses in the
county last year” cannot be false if the defendant possesses evidence
sufficient to avoid a verdict on summary judgment? What’s so different about “science”?

What the GNC line
of cases is really saying is that courts will not engage in the very process
they’re constituted to engage in if a consumer protection case requires a
factfinder, as the court makes clear when it says “under California law a
Plaintiff cannot maintain a false advertising claim when the defendant offers
admissible expert testimony and scientific evidence supporting the
advertisement in question.” That is, the
court will only look at one side of the evidence; I would call that not very
judicious. And by the way, this
formulation means that in fact there is a substantiation requirement under
California law—just one in which the quality of the substantiation is judged by
a minimal standard, that of admissibility. When a rationale for a rule makes
the rule a failure on its own terms, there is something deeply wrong.

Because there was competent evidence on both sides, the
defendant won on summary judgment. If
you see something wrong with that previous sentence, then you see the problem
with GNC.

Friday, August 25, 2017

Hosseinzadeh posts original video content on YouTube,
playing a character known as “Bold Guy.” Ethan and Hila Klein criticized “Bold
Guy vs. Parkour Girl,” in which the Bold Guy flirts with a woman and chases her
through various sequences, in a video titled “The Big, The BOLD, The Beautiful.”
The accused video is almost fourteen minutes long, and intersperses long
segments of commentary with short clips of the Bold Guy video, ultimately using
three minutes and fifteen seconds of that five minute, twenty-four second long
video. “As critical as it is, the Klein video is roughly equivalent to the kind
of commentary and criticism of a creative work that might occur in a film
studies class.” From that, you can fill in the rest of the fair analysis:
Kleins win.

Remaining claims: a §512(f) false DMCA counternotification
claim and defamation based on statements about the lawsuit. Those fare no
better. If a subjective good faith belief is enough to submit a §512 notice, as
the Ninth Circuit has held, then the same is true for a counternotification.
Since the video was fair use, there weren’t any misrepresentations in the
counternotification. But even had the court found otherwise, the §512(f) claim
still fails because the Kleins “clearly had a subjective ‘good faith belief’ that
their video did not infringe plaintiff’s copyrights.” The court emphasized that
it was “undisputed that defendants understand the concept of fair use and have
an established practice for ensuring their videos make fair use of copyrighted
material,” which was enough to clearly
establish their good faith belief/win summary judgment.

Defamation: nothing in the lawsuit video was defamatory; it
was either substantially true or opinion. E.g,, Ethan Klein’s statement “I
think that the heart and soul of this is . . . he doesn’t like that we made fun
of him, and so he’s suing us” was “a quintessential statement of pure opinion.”
The plaintiff also challenged Ethan Klein’s statement that “several months
passed [and] nothing happen[ed]” prior to plaintiff’s first settlement offer
and threat of litigation, when plaintiff sent a warning email during that time.
A statement is “substantially true” “if the statement would not have a
different effect on the mind of the reader from that which the pleaded truth
would have produced.” Plaintiff argued that Klein’s statement portrayed him as
“a trigger-happy litigant who immediately activates his lawyers when he is criticized.”
But (1) in context, the statement was clearly about the Kleins’ surprise and
disappointment that a lawsuit was filed several months after they first posted
the video, and didn’t necessarily mean that the parties had no communication
during that period. And (2) anyway, mention of the warning email wouldn’t have
changed anything—if the actual statement would lead a viewer to see plaintiff
as a “trigger-happy litigant,” “it is exceptionally unlikely that knowledge of
the April 2, 2016 email, in which plaintiff explicitly threatened ‘costly’
legal action if defendants did not comply with his demands within twenty-four
hours, would change that perception.”

This image, of a government employee telling a grant applicant that her proposal can't use "climate change" or "global warming" and get funded, seems like a pretty good example of a "happy talk" provision. Is this new requirement an unconstitutional condition/viewpoint discrimination under Rust and Finley?

Thursday, August 24, 2017

The underlying class action claimed that Google violated
users’ privacy by disclosing their internet search terms to owners of
third-party websites. The court of appeals, over a partial dissent, finds that the
district court didn’t abuse its discretion in approving the $8.5 million cy
pres–only settlement. The settlement
provided that Google would provide information on its website disclosing how
users’ search terms are shared with third parties.

About $3.2 million was set aside for attorneys’ fees,
administration costs, and incentive payments to the named plaintiffs, and the
remaining $5.3 million or so was allocated to six cy pres recipients who agreed
“to devote the funds to promote public awareness and education, and/or to
support research, development, and initiatives, related to protecting privacy
on the Internet”: AARP, Inc.; the Berkman Center for Internet and Society at
Harvard University (disclosure: I am affiliated with the center, now the
Berkman-Klein Center); Carnegie Mellon University; the IIT Chicago–Kent College
of Law Center for Information, Society and Policy; the Stanford Center for
Internet and Society; and the World Privacy Forum. Each recipient submitted a
detailed proposal for how the funds would be used to promote Internet privacy;
the dissent criticized the inclusion of the relatively new Chicago-Kent
program, and the majority opinion touts its accomplishments.

Because this settlement took place before formal class
certification, settlement approval requires a “higher standard of fairness.” Cy
pres-only settlements are the exception, not the rule. They are appropriate where the settlement
fund is “non-distributable” because “the proof of individual claims would be
burdensome or distribution of damages costly.” The district court reasonably
found the settlement here non-distributable; “each class member was entitled to
a paltry 4 cents in recovery—a de minimis amount if ever there was one,” and
the cost of finding and verifying them would far exceed that.

Objectors sought a requirement that some non-named class
members be compensated, perhaps by lottery.
But that’s not required for fairness.
Further, the fact that the settlement fund was non-distributable doesn’t
disprove superiority under Rule 23(b)(3). “[T]he purpose of the superiority
requirement is to assure that the class action is the most efficient and
effective means of resolving the controversy.” Small individual recoveries are
a hallmark of situations where class actions are superior, so that’s consistent
with a cy pres-only settlement.

The majority also rejected objectors’ challenges to the
recipients due to claimed relationships between counsel or the parties and some
of the cy pres recipients. To avoid unfairness and abuse, cy pres awards must meet
a “nexus” requirement by being tethered to the objectives of the underlying
statute and the interests of the silent class members. But objectors didn’t argue
that the nexus requirement had been violated; the recipients were independent,
established national organizations with “a record of promoting privacy
protection on the Internet.” “Although the district court expressed some
disappointment that the recipients were the ‘usual suspects,” it recognized
that “failure to diversify the list of distributees is not a basis to reject
the settlement ... when the proposed recipients otherwise qualify under the
applicable standard.’”

However, the objectors argued, Google had in the past
donated to some of the cy pres recipients, three of the cy pres recipients
previously received Google settlement funds, and three of the cy pres
recipients were organizations housed at class counsel’s alma maters. The ALI
says, “[a] cy pres remedy should not be ordered if the court or any party has
any significant prior affiliation with the intended recipient that would raise
substantial questions about whether the selection of the recipient was made on
the merits.” But not every prior relationship is disqualifying. The fact that
Google had a role in reviewing the recipients wasn’t disqualifying, as long as
the nexus requirement was satisfied, because Google was entitled to bargain in
its own interests. Moreover, Google’s
earlier donations were unsurprising, given “the burgeoning importance of
Internet privacy” and the breadth of its donations; the district court
conducted its own review of the recipients’ proposals and found them
appropriate. “Notably, some of the
recipient organizations have challenged Google’s Internet privacy policies in
the past,” but more importantly, the process was transparent and the proposed
recipients disclosed previous Google donations and explained how the cy pres
funds were distinct from Google’s general donations.

Previous receipt of cy pres funds from Google wasn’t
disqualifying “without something more, such as fraud or collusion,” and a ‘new
recipient every time’ rule would be in tension with the nexus requirements,
which prefer a cy pres recipient with a “ ‘substantial record of service.’ ” “But
in emerging areas such as Internet and data privacy, expertise in the subject
matter may limit the universe of qualified organizations that can meet the
strong nexus requirements we impose upon cy pres recipients.”

Finally, class counsel’s alma maters didn’t matter. There might be a case where alumni
connections could cast doubt on the propriety of the selection process, but
this wasn’t it. “[C]lass counsel have no ongoing or recent relationships with
their alma maters and have no affiliations with the specific research centers,”
which were well-recognized in the relevant field; the objectors didn’t suggest
more qualified alternatives.

Judge Wallace agreed that a cy pres-only settlement was
appropriate in this case and agreed that the fee award was fine, but was
troubled that “47% of the settlement fund is being donated to the alma maters
of class counsel” and wanted an evidentiary hearing at which class counsel
would be examined under oath about the role of their prior affiliations in the selection. Given the connection, Judge Wallace wouldn’t
put the burden on the objectors to show that the settlement might be tainted; district
courts “must be particularly vigilant not only for explicit collusion, but also
for more subtle signs that class counsel have allowed pursuit of their own
self-interests and that of certain class members to infect the negotiations.” A
cy pres-only settlement was a yellow flag, as was a settlement before class
certification; adding several million dollars being given to class counsel’s alma
maters raised a red flag, especially to the newborn Chicago-Kent center. The burden should be on class counsel to show
appropriateness, and one-line declarations of a lack of present affiliation
with the relevant institutions weren’t sufficient. Unsworn statements in court weren’t enough: “My
experience as a trial judge taught me to be skeptical of unsworn statements
from lawyers, especially when it comes to conflict of interest issues.” Judge
Wallace wanted to know, among other things, what other institutions were
considered, whether counsel donated funds in the past, whether their family
members served on any alma mater committees or boards, and how often counsel
visited.

The court of appeals affirmed the district
court ruling that a nonprofit egg certifier’s disparagement of an egg
seller who wasn’t certified by the nonprofit was commercial speech. HFAC certifies egg producers for humane
treatment of their laying hens, and it sent an email to thirty-six grocery
retailers, including some of the largest grocery chains in the nation, stating
that Handsome Brook Farm lacked up-to-date certifications to support its
representations that its eggs are organic and pasture raised. The email
continued, “I hope you reconsider changing suppliers,” and touted egg producers
with HFAC’s certification. Though Handsome
Brook lost existing and potential retailers as a result, its organic
certifications were up-to-date and its pasture-raised certification had been
recently audited. The district court preliminarily enjoined HFAC from circulating
the email and required HFAC to publish a retraction email.

HFAC’s “Certified Humane” certification process is one of
several in the market. HFAC charges
between $75 and $300 for an application, $600 per day per inspector for any
farm inspection, and five cents for every thirty dozen eggs the producer sells
with the Certified Humane label. It also solicits donations, because its
revenue doesn’t fully cover its expenses.

Gordon & Breach,
once the leading case on the matter, defined “commercial advertising or
promotion” as (1) commercial speech (2) by a defendant in commercial
competition with the plaintiff (3) for the purpose of influencing consumers to
buy goods or services, (4) sufficiently disseminated to the relevant purchasing
public to constitute advertising or promotion within that industry. The court of appeals adopted the Gordon & Breach factors, except for
(2), indicating that Lexmark had
defined standing beyond direct commercial competition. “[A]ny communication that is commercial
speech, promotes a good, and is sufficiently disseminated is an advertisement
for the promoted good, regardless of the speaker.” Competition was a gatekeeping factor that had
been superseded by Lexmark.

So, was the email commercial speech? The basic factors are: whether the message is
economically motivated, promotes a specific product, and is an advertisement. The
Fourth Circuit has also previously asked whether the message is “placed in a
commercial context and [is] directed at the providing of services rather than
toward an exchange of ideas.” Greater Balt. Ctr. for Pregnancy Concerns, Inc.
v. Mayor & City Council of Balt., 721 F.3d 264 (4th Cir. 2013).

HFAC, as a nonprofit, had a noneconomic purpose in
advocating for the humane treatment of farm animals. But it also had an
economic motivation in the sale of its licensees’ eggs, not just from revenue
from egg sales, but also from becoming a market leader in certification. “This hope of economic gain is made even more
apparent by the email’s target audience: grocery store chains, including some
of the largest in the nation, that HFAC had a relationship with and that were
considering switching their egg supplier from another brand to Handsome Brook.”

The speaker’s identity “factors into the reasonable
recipient’s perception of economic motivation,” such that a for-profit company
“is often presumed to have primarily economic motivations for its speech. Thus,
a corporation’s informative literature or seminar is often still seen as
commercial speech, especially if it includes any product promotion,” as in Bolger. “Conversely, a non-profit organization is
often presumed to have primarily noneconomic motivations for its speech, even
if there are ancillary economic benefits. Thus, a watchdog non-profit
organization’s report on allegedly abusive or unethical practices is still
likely noncommercial speech, even if the report garners more donations; a
reader would know that the watchdog organization’s primary motivation for
publishing the report is noneconomic.”
But the speaker’s nonprofit status isn’t categorically determinative. “Where a non-profit organization has a direct
economic stake in the provision of its product or service, and structures its
message in the hopes of realizing an economic gain rather than merely informing
the public or pursuing its ideological views, it may reasonably be viewed as
economically motivated.” Given the
targeting of retailers considering or recently switched to Handsome Brooks
eggs, and given the comparative touting of HFAC-certified eggs, the court found
that HFAC had an economic motivation despite its status as a nonprofit.

HFAC argued that its email didn’t specifically promote HFAC-certified
eggs, but merely urged retailers to purchase any eggs that were humane, rather
than Handsome Brook’s allegedly inhumane eggs. But the email “implicitly
compared its licensees to the licensees of any other humane certification, and
touted HFAC-certified eggs over all other eggs, including eggs certified by
other organizations.” Given this, “HFAC’s
message was placed in a commercial context and fixated on the provision of
services rather than advocacy of its ideological commitments.” Its message “focused, not on ideological or
moral concerns, but on economic and legal ones—‘this in turn protects you.’” Indeed,
“HFAC’s message fits neatly into the type of promotional, commercial activity
an identical for-profit organization would engage in.” Thus, the email could be distinguished from a
nonprofit’s charity auction or ancillary sales of paraphernalia, like hats or
t-shirts or pens. In such contexts, a
reasonable audience “would recognize that the context was meant to celebrate,
promote, and spread [the nonprofit’s] ideological mission.”

The email, however, “also in part disseminates noncommercial
speech: its warning to retailers about Handsome Brook’s allegedly fraudulent
labeling.” But this message wasn’t “inextricably intertwined” with HFAC’s
promotion of its license, and so the email was correctly treated as commercial
speech. [Note the conceptual weirdness
of this reasoning: the speech that the court specifically calls out as
noncommercial is also the speech that was false, and for which HFAC was held
strictly liable because the email as a whole was commercial speech. Why do this slicing? The same motive/focus on competing services
reasoning absolutely applies to the warning, making it pure commercial speech
under the court of appeals’ own reasoning.
Just because the same words could, in another context, be noncommercial
speech doesn’t change that; the same words in HFAC’s self-promotion could also
be noncommercial speech in another context.]

Under “inextricably intertwined” analysis, nonprofit
solicitation for charitable donations is noncommercial speech, wholly protected
by the First Amendment, even though it solicits money. Such solicitations are
intertwined with informative/persuasive speech, and without solicitations, the
flow of such speech might stop. Anyway, a nonprofit isn’t primarily concerned
with providing information about the characteristics and costs of goods and
services. But “[n]o law of man or of
nature makes it impossible” to warn the public of misleading labeling without
promoting one’s own products, so the “commercial proposition” in HFAC’s email wasn’t
“inextricably intertwined” with its noncommercial message, making the email as
a whole commercial speech despite its mixed messages.

Finally, dissemination to thirty-six retailers, including
some of the largest supermarket companies in the nation, was sufficient. “[A]
‘cold-send’ to anonymous recipients is not needed for a dissemination to be
considered advertising.”

HFAC also argued that its statements weren’t false or
misleading, because it had in fact received a complaint about Handsome Brook’s
eggs from another producer’s employee, justifying the statement: “Based upon a
whistleblower complaint we recently conducted a traceability inspection of a
packing plant that packs Certified Humane® eggs and also packs Handsome
Brook[’s ] eggs.” But that didn’t
matter, because HFAC never conducted an audit “based on” the complaint it
received. In fact, HFAC wasn’t Handsome Brook’s licenser, so it couldn’t do any
inspection.

Irreparable harm: in extraordinary circumstances, were
monetary damages are unavailable or unquantifiable, they can constitute
irreparable harm. The district court
found that the email caused two retailers to remove Handsome Brook eggs from
their shelves and a third retailer to indefinitely suspend plans to sell
Handsome Brook eggs. In addition, the email strained client relationships and
led to continued discussion. Under these
circumstances, finding irreparable harm wasn’t abuse of discretion. “The
business’s reputation continues to be tarnished as questions about the
reliability of its labeling continue to circulate. And even if the monetary
damages from Handsome Brook’s lost profits were quantifiable, they would likely
be unattainable at judgment; Handsome Brook estimated that its monthly loss of
revenue could number in the hundreds of thousands, and HFAC is a non-profit
organization that likely cannot pay the damages Handsome Brook would be due.”

HFAC argued that the injunction was an unconstitutional
prior restraint on its speech and mandated an unconstitutional compelled
disclosure. Commercial speech isn’t subject to prior restraint doctrine, and compelled
speech is more likely to be constitutionally permissible in the context of
commercial speech. Thus, “disclosure requirements aimed at misleading
commercial speech need only survive rational basis scrutiny, by being
‘reasonably related to the State’s interest in preventing deception of
consumers.’ ” A retraction email
satisfied that standard, mitigating the harm of the first message. It also served the public interest in
truthful information.

Monday, August 21, 2017

This case stands as a stark reminder that adding a state-law
deceptive trade practices claim to a federal claim can have serious
consequences—the only reason to do it as a plaintiff is if you think the
substantive standards will vary (certainly possible, depending on the state) or the
remedies will vary (likewise). But where
that’s true, consider whether the fee-shifting standards will also vary. In Florida, they do.

Here, Procaps is ordered to pay about $18.5 million in
attorneys’ fees and costs after losing “a full-throttle lawsuit which has
generated 1165 docket entries and an appeal (including oral argument) since it
was first filed in mid-December 2012.”
Procaps’ main claim was a federal antitrust claim, but it brought a
coordinate Florida Deceptive and Unfair Trade Practices Act claim. The federal antitrust statute authorizes an
award to a prevailing plaintiff but not to a prevailing defendant, but that
turns out not to matter even though the FDUTPA claim was a “tag-along” claim, “based
mostly (though not entirely) on the same circumstances at issue in its federal
Sherman Act antitrust claim.”

Under FDUTPA, a “prevailing defendant” is permitted to
recover its attorney’s fees and costs from a non-prevailing plaintiff after the
exhaustion of all appeals; the court has to consult a non-exhaustive list of
discretionary factors:

(1) the scope and history of the
litigation; (2) the opposing party’s ability to satisfy the award; (3) whether
an award would deter others from acting in similar circumstances; (4) the
merits of the respective positions, including the degree of [Procaps’]
culpability or bad faith; (5) whether the claim brought was not in subjective
bad faith but was frivolous, unreasonable, or groundless; (6) whether the
defense raised a defense mainly to frustrate or stall; and (7) whether the
claim brought was to resolve a significant legal question under FDUTPA law.

I’ll let the judge summarize the scope and history: “Nothing
was easy in this case. Nothing. Basically, the parties fought about anything
and everything.” Further descriptors: “difficult,” “problematic,” “stressful,”
“grueling,” “especially unpleasant and nasty.” Procaps could pay. On appeal, the Eleventh Circuit characterized
its theory as “intrinsically hopeless,” so that supported a fee award. Procaps and its counsel, “at a minimum, … made
this case far more difficult than it had to be, and … this caused Patheon to
incur additional attorney’s fees and costs.” Frivolousness isn’t a requirement,
and courts award fees under FDUTPA to defendants who prevail on summary
judgment on a FDUTPA claim after a plaintiff initially gets past a motion to
dismiss. Though the court declined to
find the claim frivolous, its antitrust theory was “either unreasonable or
approaching the level of being unreasonable,” because it needed and could not
show concerted action.

In terms of deterrence, the court considered that Procaps
apparently brought its antitrust claim because it was a limited exception to
the parties’ arbitration agreement “and because it wanted to use the threat of
treble damages to pressure Patheon into paying a hefty settlement.” Because of
the weakness of the antitrust claim, a fee award wouldn’t deter legitimate
antitrust claims brought by private attorneys general, but it would be good to
deter a putative plaintiff from bringing an “intrinsically hopeless” antitrust
claim. The remaining factors were
neutral, and the court declined to follow a few federal district court cases
holding that FDUTPA fees shouldn’t be awarded when the FDUTPA claim is a
tag-along to a separate federal claim.

In fact, Florida state caselaw indicates that the prevailing
party should get the benefit of overlapping claims; fees can’t be deducted for
work unless it was clearly unrelated to the FDUTPA claim. “[I]t is Procaps’ burden to establish that
the attorney’s fees and costs incurred by Patheon were clearly not related to
the FDUTPA claim, which was largely based on the same antitrust theory as the
antitrust count.” Thus, “the time Patheon spent defending the Sherman Act claim
was time spent defending the FDUTPA claim.”
And that’s $18.5 million.

The court emphasized that not every party who prevails on a
FDUTPA claim would be entitled to fees; if “some” of the factors had gone in
Procaps’ favor, the result could well have been different. But the factors
“strongly” favored a fee award.

Tyson sought attorneys’ fees in this Lanham Act case after
its summary judgment victory was affirmed by the Third Circuit. The court found
that this was not an exceptional case meriting an award of fees, despite the
novelty of Parks’ main legal theories.

There was an unusual degree of discovery trouble in the case,
but not because of “wasteful procedural maneuvers” or “dilatory tactics.” Instead,
the parties just didn’t seem to understand each other’s claims or to work
collaboratively at discovery; this didn’t mean that one side litigated the case
in an unreasonable manner.

Tyson argued that all three of Parks’ Lanham Act theories—false
advertising, false association, and trademark dilution—were frivolous, but the
court disagreed. The primary claims were for false advertising and false
association. The first theory was that Tyson’s use of the name “Park’s Finest”
was false, or at least misleading, because it conveyed to consumers that Tyson
was selling Parks’s finest product. From early on, the evident problem was that
this seemed to simply duplicate the false association claim. But that didn’t weigh against a fee award,
because “at the time Parks brought the claim, there was little case
law—particularly in this circuit—addressing the dividing line between claims of
false advertising and claims of false association.” On appeal, the Third Circuit also noted that
this case offered an opportunity to “clarify” what it had never before directly
held about that line. “Given the state
of the governing law at the time this case was filed, Parks’s decision to
attempt a claim under the banner of false advertising was not ‘unreasonable.’”

Anyway, the collapse of theory one into theory two (false
association) meant that the merits were the same as to both, and the false
association claim was not so “exceptionally meritless” as to warrant fee
shifting. But really, this case was about failed proof: the Parks name “once
enjoyed widespread recognition” as a result of an ad campaign that was at one
time “ubiquitous and long-running,” so much so that the appellate judges
recalled it at oral argument. That
recognition, it appeared, no longer existed, but this past glory “differentiates
this case from the mine-run of frivolous trademark infringement suits brought
by plaintiffs who seek to prevent others from infringing on marks that do not
and have never had the sort of recognition in the marketplace that would
entitle them to protection.” The similarity of the parties’ marks and goods
also made the suit potentially meritorious.
“Even now, Tyson perhaps does not appreciate how close it may have come
to a different result in this case.… A properly-designed survey (and perhaps a
bit more modesty in the geographic area Parks sought to protect) might have
changed the course of this case.”

As for Parks’s claim for trademark dilution, which was
voluntarily withdrawn at summary judgment, it “had little chance of success
from the start,” but a fee award isn’t about how great the disparity was
between the parties’ positions—it’s about whether the present case “stands out
from others.” And dilution claims are
commonly “tacked on to claims for trademark infringement or false association,”
despite the rarity of true fame; as a result, “the vast majority of attempted
dilution claims not only fail, but had very little chance of ever succeeding.” Fees could be available for some non-meritorious dilution claims,
but in light of the Parks name’s former strength, “the company’s attempt to
characterize its mark as ‘famous’ is not so different from numerous other
plaintiffs that have tried the same thing, despite having hardly any chance of
being considered alongside that pantheon of truly famous marks.” [Urgh.]

Parks’s motivation, though not dispositive, also seemed
legitimate to the court: Parks “genuinely viewed Tyson’s use of the name
‘Park’s Finest’ as an existential threat—a potential final blow to the
once-prominent company, inflicted by a competitor that, by revenue, is
approximately four thousand times its size.” Parks’ good faith was relevant,
and also weighed against a fee shift.

In resolving cases of unfair, abusive,
and deceptive acts and practices, consumer protection enforcement agencies
often prospectively dictate—in great detail—the design of defendants’
marketing, websites, disclosures, sales processes, and products. However,
advances in technology and analytics increasingly allow defendants to comply
meticulously with these precise requirements while simultaneously continuing to
deceive and injure consumers.

By trying to micromanage
defendants’ conduct, enforcement agencies fail to protect consumers, squander
precious enforcement resources, and create pointless compliance work for
defendants. Defendants themselves are in the best position to ascertain how to
cure the confusion and ill consequences they have wrought and they should bear
ultimate responsibility for doing so.

To effectuate this, this article
introduces two new performance-based remedies to consumer law enforcement: (1)
confusion prohibitions and (2) consequences prohibitions. These injunctive
remedies order defendants to eliminate the confusion and ill consequences
induced by defendants’ fraud. To comply with these prohibitions, defendants
would be required to reduce the confusion and ill consequences they inflicted
on their customers to prescribed levels within a prescribed time period. Defendants
would bear the costs of demonstrating, through independent third-party audits,
their compliance.

Friday, August 18, 2017

SolarEdge sued Enphase, a competitor in the business of
selling electronic components for solar panels (aka PV modules), for false
advertising and trademark infringement.
SolarEdge’s primary products are components involved in the
“optimization of energy generated from solar panels.” PV modules convert solar energy to direct
current, which then must be converted to alternating current to be delivered
through the power grid. An “inverter” performs
this conversion. Traditionally, competitors in the industry have used multiple
solar panels connected to one or a small number of centralized inverters.
SolarEdge’s “power optimizers” are attached to each individual solar panel and
then connected to a simplified centralized inverter to aid in a more efficient
conversion from DC to AC. This practice is referred to as “module-level power
electronics” (MLPEs). Enphase instead uses “microinverter” technology, which
attaches a “small inverter at each solar panel,” also an MLPE.

MLPEs can come in two varieties: an embedded MLPE is
installed into the solar panel before it leaves the factory, thereby reducing
the time required to install a PV system at an end user’s location. Non-embedded MLPEs are installed on-site. SolarEdge alleged that it produced embedded
power optimizers, but that it was still known “primarily for its non-embedded
optimizers, as embedded technology is still not widely used in the PV
industry.”

Enphase announced that it would be offering an embedded
version of its microinverters, the Enphase AC Module. Its ad campaign included
a video, “Enphase Energized AC Module vs. String+Optimizers,” purporting “to depict a time-compressed video
comparison between the installation times for PV systems using comparable
SolarEdge and Enphase products.” On Enphase’s website, the video appeared with
the text “Stop wasting time installing optimizers—When compared to optimizers,
the Enphase AC Module cuts rooftop installation time in half. See for
yourself.” The video also featured a testimonial from an installer attesting to
the ease of installing an AC Module panel as compared to a non-embedded
SolarEdge power optimizer. The video ended displaying the conclusion that the
“Enphase Energized AC Module cuts installation time in half.” SolarEdge alleged
that the comparison was false because it tested the AC Module against SolarEdge’s
non-embedded optimizer, rather than the embedded version. The video also included
SolarEdge’s stylized logo, displayed throughout the video.

This motion for preliminary injunction hinged on whether the
claims at issue were literally false, given that the heading and the
introductory page of the video purports to compare the AC Module against
“string+optimizers” generally, and implied that SolarEdge didn’t produce an
embedded version. Enphase argued that the marketing campaign was directed at
experienced installers, who would immediately recognize the specifics of the
comparison; also, other statements on the website, such as “Stop wasting time
installing optimizers,” indicated no literal falsity because that statement
wouldn’t make sense if Enphase were comparing its embedded technology against
embedded optimizers. Also, nothing in the video suggested that Enphase is the
only producer of embedded MLPE technology.
On this record, the court did not find likely success on the merits.

Trademark infringement: The court applied nominative fair
use and (rightly) found in favor of Enphase, despite the use of SolarEdge’s
stylized logo. Under Ninth Circuit
precedent (to the extent it can be discerned), if a nominative use fails to
satisfy all three factors, “the district court may order defendants to modify
their use of the mark so that all three factors are satisfied,” but “it may not
enjoin nominative use of the mark altogether.” In a useful reformulation, the court here
said: “while satisfying all the factors necessarily negates trademark
infringement liability, the failure to satisfy one of the factors does not
establish liability in and of itself.” So NFU is only a replacement for the
multifactor test if the defendant succeeds; this is an important clarification
of Judge Kozinski’s muddling of the issue in Tabari.

This ues in a comparative ad satisfied all three factors,
and regardless SolarEdge didn’t make any arguments about how confusion over
sponsorship or endorsement by SolarEdge.

The court briefly addressed irreparable harm as well. SolarEdge argued that it would suffer lost
sales if Enphase if the ad could be shown at an upcoming trade show, one of the
largest in the industry. It also argued
that Enphase was unlikely to be able to pay damages here, given that it had
faced significant financial difficulties of late. The court found “only a bare, threshold
showing” on irreparable harm—statements from a senior executive could be
evidence of irreparable harm, but the record lacked data supporting her
conclusions. Also, Enphase’s modification of the ads to clarify that the
comparison was to non-embedded, standalone optimizer systems minimized the
likelihood of irreparable harm, as did the court’s adoption of a fast schedule
for further proceedings on the case.

This is a tangled story that illustrates how false
advertising claims can arise from failed business agreements. Plaintiff NPK sued Nicholas Jackson and
Jessica Lilga for conspiring with Jim Heagle to eliminate NPK from the
distribution market for frequency-water products. NPK contracted with Yeti to market and
distribute Yeti’s product known as frequency water, which appears to be sold as
a better way of preventing plant mildew/mold than regular water. NPK created three plant washes, Mighty Wash,
Power Wash, and PM Wash, all of which contained and were marketed as containing
frequency water.

Jackson is a part owner of NPK, though his relationship with
NPK was bad for a while. Lilga initially
took over Jackson’s responsibilities as VP of sales when Jackson was
incarcerated, though that relationship was also difficult and ended after three
weeks. As Jackson continued to negotiate
his exit from NPK, he sent Heagle a draft copy of a proposed NPK ad that
depicted a new series of products: “They’ve been lying to you. I mean, sitting
there telling you they weren’t going to do other products. They already did....
They’ve got their whole nutrient line....” Heagle moved to terminate Yeti’s
distribution agreement with NPK; the termination letter said that the “last
straw” was the draft ad. Yeti and NPK
worked out an agreement for continued supply for a year, in exchange for which NPK
would turn over to Yeti certain frequency-water-related trademarks that NPK had
registered in its name. This agreement
didn’t work out; the parties sued each other in state court. NPK also sued Jackson in state court; Jackson
countersued.

By this time, NPK’s distribution agreement with Yeti had ended
and NPK had relaunched its product line without Yeti’s frequency water. Jackson
began working with Left Coast, a former distributor of NPK’s products, to
launch a competitive product line using Yeti’s frequency water. Jackson
promised to supply Left Coast with a list of 1300 Sunlight stores; Sunlight was
a major NPK customer. Left Coast then
sent emails to NPK’s customers stating that it had “decided to discontinue
distributing products from NPK industries” because NPK’s new plant-wash line,
which no longer contained frequency water, was susceptible to molding. It also stated that Left Coast would now
“provide the original frequency altered formulations and will be marketing
under the trade names Mega Wash, White Wash, and Freq Wash....” The emails,
plus the new Left Coast product line, halved NPK’s sales, which had already
been halved earlier in the year due to the loss of Yeti’s frequency-water
products.

In this litigation, NPK sued Jackson for fraudulent
misrepresentation, violations of the Lanham Act, common law trade libel,
conversion, and breach of the parties’ nondisclosure agreement.

Fraudulent misrepresentation requires showing, by clear and
convincing evidence: (1) a material misrepresentation that was (2) false, (3)
made with knowledge of its falsity or with ignorance of its truth, (4) with the
intention that it be acted upon by the party claiming fraud, and (4) that the
acting party in fact justifiably relied on the material misrepresentation, (5)
suffering an injury as a result. Typically, “mere silence is not fraud,” but
“[w]here the law imposes a duty on one party to disclose all material facts known
to him and not known to the other, silence or concealment in violation of this
duty with intent to deceive will amount to fraud....” NPK argued that Jackson
“had a special relationship with [NPK] which included the duty to disclose to
[NPK] all information which could damage its business,” including his
assistance in bringing competitive products to the market and assistance in
cutting NPK out of the plant-wash distribution market.

The court disagreed.
Members of an LLC who aren’t managers, as Jackson wasn’t once he was
incarcerated, owe no duty to disclose information that could damage its
business. As for fraudulent
misrepresentation through active concealment, the evidence didn’t show active
concealment—“Jackson repeatedly attempted to leave NPK and made his intentions
to do so quite clear.” His failure to disclose private business negotiations was
distinct from active concealment, which requires the fraudster to take steps
that eliminate an opportunity to discover the truth, leading the victim to rely
on the falsity.

Lanham Act claim: Jackson allegedly told NPK’s customers that
NPK’s plant-wash products were susceptible to molding; that their products no
longer contained frequency water; that frequency-water products would no longer
be distributed by NPK; that Lest Coast and other wholesalers discontinued
distribution of NPK’s products; and that Yeti was releasing a “new and improved
product line....” Further, Jackson allegedly aided in distributing e-mails
falsely claiming NPK was being investigated and going to be shut down by the
EPA, IRS, DEQ, and other agencies.

NPK easily showed harm from these statements, and the court
was convinced that Jackson participated in their distribution. However, NPK could only show falsity for two
statements. (That conclusion would seem
to require a re-evaluation of the harm question—can NPK show harm flowing from
the false statements specifically?) It
was true that NPK’s products no longer contained Yeti’s frequency water at the
time the statement was made; it was true that Left Coast and others
discontinued distribution of NPK’s products; it was true that Yeti was
releasing a new-and-improved product line.

The statements that NPK was being investigated by the EPA,
IRS, DEQ, and other agencies were not literally false—NPK’s witness testified that
NPK was being investigated, though its position was that Jackson and Left Coast
had prompted their investigations by providing false information. However, the statements “were likely to, and
in fact did, mislead or confuse consumers, as these statements implied the
agencies were going to shut down the company.” The “susceptible to molding” claim
was also rebutted at trial, and thus proved false. These statements were also material: molding would
indicate that the products didn’t work as intended, and false statements that
NPK would be shut down for regulatory noncompliance “certainly raised the
presumption that its products or business was operating improperly or outside
the law.” Thus, NPK proved a Lanham Act
violation.

Common law trade libel: the court found that NPK didn’t prove
that Jackson made or aided in the distribution of the two false statements
maliciously or with knowledge that they were false. In fact, he appears to have
believed his own claims (drunk his own frequency water?) that molding would be
a risk without frequency water. This belief
also meant he didn’t act with malice. Though
he did “demonstrate a complete disdain for NPK,” that contempt isn’t malice. The same was true for statements involving
agency investigations into NPK.

Jackson was also liable for conversion for getting Lilga to download
NPK’s customer database. The court doesn’t address tangible/intangible property
as the subject of conversion, instead holding that Jackson’s “exercise of
control over [the property] constituted a serious interference because it
severely impacted the economic value of the database.” But NPK didn’t provide an
accurate assessment of the market value of any of the information converted. However, “if the property has no market value
at the time and place of conversion, either because of its limited product, or
because it is of such a nature that there can be no general demand for it, and
it is more particularly value to the owner than any one else, then it may be
estimated with reference to its value to him.” As secret information, the database
could be evaluated in this way. (I
believe that some states wouldn’t allow trade secret liability standards to be
circumvented in this way, though it sounds as if this information might well
have constituted a trade secret as well.)
The customer database, while valuable, was only part of the results of
NPK’s marketing campaign and couldn’t represent the entire value of NPK’s
goodwill, which included other elements such as name recognition. Still, its
customer relationships were “clearly an integral part of the value of its
goodwill.” Thus, the court would factor the conversion into the damages award.

NPK also argued that Jackson breached the parties’
nondisclosure agreement by distributing the customer lists. There was no question that he breached the
express terms of the contract by disclosing NPK’s database of customer lists
and by disclosing a proposed ad. Jackson
didn’t show that NPK failed to substantially perform any part of the its side
of the agreement. And NPK suffered ascertainable damages that were foreseeable
by the parties at the time they entered into this agreement, so Jackson was
also liable for this breach.

Civil conspiracy and aiding and abetting: because NPK didn’t
show any other torts beyond conversion and violation of the Lanham Act, and
because Jackson was already liable for those, he couldn’t be independently liable
on those claims.

Damages: “[I]f the plaintiff proves with the requisite
degree of certainty that the defendant’s violative actions have resulted in
damage, the actual amount of damages need not be proved with exact certainty.” That was the case here. “NPK went from sales of $3 million in 2012
and a profit of around $125,000 to virtually no revenues and strictly losses in
the years since.” Likewise, NPK could recover for lost goodwill, even though
“such damages are not capable of exact ascertainment.” The court found damages of a little under
$166,000. However, the end of Yeti’s distribution agreement was also
responsible for NPK’s lost goodwill, and so the court cut the damages in half,
for which Jackson’s liability was partly shared with Lilga.

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